Digital Interlopers

While many retail banks are still trying to layer basic digital services on top of clunky legacy systems Moven has moved into the market. The digital-only bank is attracting young customers by using mobile phones as primary payment devices, replacing credit cards, debit cards and cash; offering its customers an innovative way of tracking their spending by categorizing transactions and creating a purchasing behavior profile that allows for adjustments; and granting its customers the ability to improve their financial health by bringing in friends from social networks. There is also a Weight Watchers-like system of rewards and bonuses for good financial behavior.

Given its global ambitions and its initial target customer base — the over 80 million millennials in the U.S. who are expected to become a driving force in the economy within five years — it is not surprising that Moven, which launched a beta product into the market in April of this year, was able to raise an additional round of venture capital last month. (In August 2012, Moven announced $2.41 million in seed round funding from Anthemis Group and Raptor Ventures.)

The latest backing comes from Life.SREDA, a venture fund owned by a group of eight Russian commercial banks, marking the first time that any of the digital-only neo-banks have raised money from a traditional bank.

It is unlikely to be the last. “I would definitely expect more traditional banks looking to make digital investments,” says serial entrepreneur Scott Bales, Next Bank’s Singapore-based director of user strategy innovation and a Moven board member. “Many of the traditional banks are already very aware of the behavioral shift driven by digital. So I’d expect them to make strategic investments, if not acquisitions, in the digital space.” (See the story about banks partnering with payment and foreign exchange start-ups on pages 4 and 5.)

While digital interlopers like Moven were at first ignored or greeted with skepticism by traditional banks, this is no longer the case. Some banks have already started copying their best-of-breed services. BNP Paribas, for example, recently launched a standalone digital mobile bank, Hello Bank!, in Belgium, Germany and France, with plans to open in Italy in October, to counter competition from digital-only banks.

Billed as a ‘native mobile bank,’ Hello Bank! accounts can be opened in just four steps from an Android or Apple smartphone or tablet or over the Internet. The digital-first approach is backed by a team of staff working extended hours six days a week to answer queries via chat, email, tweet and phone. Hello Bank! users also have access to BNP Paribas’s extended branch network and online brokerage via Cortal Consors in Germany. BNP Paribas has said it hopes to attract 1.4 million customers for the service over the next five years.

Ease of use, an engaged customer base, differentiated distribution (no branches) and strong digital (mobile and Web) support are all the rage, but it is a new approach to the basic day-to-day bank account that is resonating with digital natives, Brett King, Moven’s founder and CEO, explains in a blog post.

Among the neo-banks only Germany’s Fidor Bank has a banking license. Others like Simple and Finland’s Holvi rely on the back offices of traditional banks. Although they are proving attractive to digital natives the neo-banks remain niche players. Some may end up licensing what they do best to traditional banks, says Uday Goyal, a co-founder at London-based Anthemis Group, an investment and consulting group specializing in 21st-century financial services. Anthemis is an investor in Simple, Moven and Fidor Bank and recently revealed that it has raised an undisclosed amount of investment from Life.SREDA.

But not all neo-banks are ready to content themselves with just a slice of the market. “I think in the short term digital-only banks will start with success in one product vertical, but quickly diversify to other verticals as they scale, just like Amazon did, starting in books, and spreading to all online retail,” says Bales, who is also a scheduled speaker at Sibos. “Right now there are key engagement verticals in which the neo-banks are finding success, and in time that success is only going to grow, fast.”